Connected Tax Department of Future Can Guide Corporate Strategy

Tax departments are changing, and fast. Today’s tax department is likely to look very different in five years compared with how it looks today. This will be the result of rapid technological advances, as well as changes within the broader business and policy landscape.

Tax is currently in the middle of a major transformation journey helping to drive the emergence of a new model that could be described as “the connected tax department of the future.”

What will the connected tax department of the future look like? We can think of it as a tax department that works closely with a wide range of stakeholders, inside and outside the organization. Internally, these stakeholders will include investor relations, information technology, legal, communications, mergers and acquisitions, sustainability, supply chain, and procurement. Critical stakeholders are the senior leaders responsible for big operational decisions that pose potential tax-related risks, such as the location of subsidiaries.

With tax and incentives increasingly influencing where subsidiaries should be located, having a strong internal network with senior decision-makers will encourage tax advice to be sought as a matter of course before any deals are done.

This will be a step forward from what can frequently happen today: Tax isn’t brought into the process early enough and often only after major decisions have been made. Companies may then find themselves having to manage complex tax issues that could have been avoided with more upfront planning.

Guardians of Transparency

As well as liaising with internal stakeholders, the connected tax department of the future is likely to have strong relationships with the company’s external stakeholders. Among these are national tax authorities, which are demanding ever greater transparency from companies around their tax affairs.

Companies that operate in as well as outside the EU may also find that the onset of public country-by-country tax reporting from June 2024 could put them in the spotlight from the point of view of consumers, the media, and civil society organizations. A business should have a strategy in place for engaging with the public on the company’s tax affairs to articulate the true story behind the numbers.

The rise in importance of the transparency movement is already impacting a company’s relationship with its investors. Some environmental, social, and governance rating agencies are evaluating tax criteria when issuing ESG ratings, and this practice is likely to become more widespread once public reporting becomes available. Investors will increasingly rely on these ratings to assess whether a company is acting appropriately in relation to tax matters.

The tax department can play an important role here by understanding which tax criteria are included in ESG ratings, working with the business to ensure those criteria are considered carefully and met, while demonstrating good governance and accountability to taxpayers.

Governance

There’s a major opportunity for the connected tax department of the future to influence its organization’s overall sustainability strategy. It can do this by monitoring tax policies, providing tax advice, and identifying opportunities to apply for incentives and funding designed to accelerate the transition to a low-carbon economy.

Tax governance is vital for managing tax risk effectively and providing greater transparency on tax matters to the board. Having appropriate tax policies, procedure manuals, and accountability matrices to maintain an effective tax control framework is important, particularly if key processes are centralized and in the case of tax controversy issues.

Consideration could be given to having a tax center of excellence made up of senior tax professionals to review key transactions for risk and define the overall strategy for tax risk management.

Technology as Enabler

Technology will continue to transform the tax function, enabling tax professionals to harness the power of data to drive value, manage costs, and mitigate risk. In EY’s 2023 Tax and Finance Operate Survey, 48% of respondents said the lack of a sustainable plan for data and technology is the biggest barrier to achieving their vision for a modern tax and finance function.

The explosion of artificial intelligence tools will significantly impact the tax function. Work currently undertaken by tax departments—including research, data compilation, monitoring of changes in tax legislation, and document drafting—could all in time be helped by AI.

AI could also potentially be used to perform rapid analysis and provide real-time tax advice, provided organizations have large amounts of accurate tax data to work with.

Accelerating Transformation

CFOs, board members, heads of tax, or other senior leaders can help to accelerate their tax function’s transformation into the connected tax department of the future, in these ways:

Open a few doors. Think about who within the business your tax professionals need to be connected with so they can build meaningful relationships and have early involvement with decision-making processes.
Encourage your tax professionals to learn more about data, systems, and processes and understand the potential of generative AI.
Empower your tax professionals with state-of-the-art technological tools for collating and analyzing data.
Support your tax professionals to develop new skillsets. While a tax technical qualification is a given, future tax professionals will also need to master the art of communicating and translating tax and regulatory matters—as well as the business implications of these—to non-tax people.

Tax Evolution

The transformation of the tax department is continuing at pace. Today’s tax professionals are evolving into agile, proactive, and responsive business partners who generate value by driving transparency, protecting reputation, and contributing to the strategic decision-making process. The connected tax department of the future might not be quite here yet, but it’s well on its way.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alexandra Loran-Wisznievski is a partner and EY Europe, Middle East, India and Africa tax deputy leader, and Clare Franklin is EY EMEIA tax transformation leader. The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organization or its member firms.